Psychology is an important tool in figuring out why we spend the way we spend and save the way we save but so is economics. In the next few paragraphs, visiting the financial mindset and also the science behind it, one should make better decisions.
First, economically speaking, why decisions are made the way they are made. According to Adam Smith in the Wealth of Nations, consumers make decisions based on price, location, and necessity. Producers attract consumers by appealing to one or all three at the same. Simply put Producer wants to maximize their profit and consumers want to minimize their spending or put in other way both groups want to maximize the take they bring into their unit whether it is a company or a family unit. That is why when a company offers a 50% off sale or any type of perceived benefit consumer’s flock to the store or the service like a herd of cattle as they perceive a chance to minimize their costs.
In other shopping matters, like normal day to day grocery shopping consumers follow this minimization of costs all the time. Recently, I was buying food for the week, and my wife and I like tuna. Normally the unit price is $1.29, which we might buy 5 or 6 cans, however, this time we bought 20 cans as the price was 10 for $10 or a $1 per unit. Knowing how long tuna lasts in our household we have now covered the month from tuna purchases. I saw the opportunity to minimize our costs and also I analytically examined the advantages and disadvantages.
This leads to the personality types, or psychology, behind spending decisions. There are four groups, Analytical, Amiable, Driver, and Expressive.
- Analytical – Very number oriented, analyzes everything, very linear in thinking. Take a while to make a decision and will break apart everything in the decision.
- Amiable – wants to be friendly, trusting, doesn’t want to rock the boat, won’t haggle on prices, and will accept the word of an “expert”.
- Driver – Will make impulsive quick decisions, will gather facts and then “pull” the trigger. Can be the most costly way to do things.
- Expressive – A flamboyant way of purchasing and investing. Wants to be noticed and is keen on being the center of attention. Expressive can also be associated with early adopters for as they like the attention.
The way one approaches financial decisions can be telling. The analytical approach will generally have the lowest positive return, as they will analyze everything and get in at higher than normal times or get out in a lower than acceptable time. The driver tends to have a higher potential return than the analytic but also based on quick decisions can also lose big. The biggest “loser” and biggest “gainer” is the expressive. They tend to be flashy and take more risks, don’t put a lot of thought into things, and they tend to win big and also lose big when appropriate. The one area people would not associate as successful in finances is the amiable. They make decisions based on trust and comfort. SO they won’t make big swings either way, but because of that they will stay the course and be consistent. Because they don’t make changes quickly or often they generally do fairly well in the long run. Although this group can be subject to swindlers and need to be careful they can experience the most success.
How do you make those important financial decisions? DO you wait and take time or do you rush in? Are you reliant on experts or yourself? There is no right answer and that is what makes financial strategy so difficult. When looking at your finances you need to consider these few points and apply them to your decision making process.
- What is your personality type?
- How are you currently in emotions? Are you up or are you down?
- What is your knowledge level in comparison to what you are doing and who can and should you trust to give you advice?